Covid Corporate Financing Facility: further details released

In our client alert entitled "Government-backed initiatives to support businesses impacted by the Coronavirus" we gave an overview of various measures announced by the UK Government to help UK business through the economic shock, one of which was the Covid Commercial Financing Facility ("the CCFF"). The Bank of England ("BoE") has now released further details for companies that are interested in participating in the scheme, which we examine in this alert.

Recap of the Covid Corporate Financing Facility

As discussed in our last alert, the CCFF is aimed at providing relief to large UK companies facing COVID 19-related disruption to their cash flows. The scheme, which is coordinated jointly by HM Treasury and the Bank of England, will provide funding to large UK businesses by purchasing commercial paper of up to one-year maturity. The facility is intended to provide financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock, and will be made available to firms able to demonstrate that they were in sound financial condition prior to the shock.

How can a company benefit from the CCFF?

The first step a company needs to take is to liaise with its bank to establish whether it issues commercial paper. If it does not, then it should participate via one of the institutions listed on UK Finance's Covid-19 Corporate Financing Facility website. Even companies that have never issued commercial paper previously are able to participate and, provided that the commercial paper is eligible for the scheme, their bank will assist with issuing commercial paper to the CCFF.

What is commercial paper?

Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest, which is typically issued by large companies to meet short-term financial obligations. Commercial paper is often cheaper than a bank line of credit, making it an ideal option for companies experiencing a sudden, but temporary, disruption to their cash flow, such as that currently faced by many companies as a result of the COVID-19 economic shock. Commercial paper is quick to put into place, often offered at a discount, generally carries lower interest rates than bonds and typically has a maturity of less than one year. However, since it is unsecured, it is usually reserved for companies with excellent credit ratings.

Are there particular conditions for commercial paper under the CCFF?

Every business day between 10:00 and 11:00am, the Covid Corporate Financing Facility Limited ("the Fund"), which is operated by BoE on behalf of HM Treasury, will purchase newly issued commercial paper in the primary market via dealers and from eligible counterparties in the secondary market. The Fund will purchase commercial paper from eligible issuers that meets the following requirements:

• Sterling-denominated;
• Maturity of between one week and 12 months;
• Where available, a credit rating of A-3/P-3/F-3 from at least one of the credit rating agencies as at 1 March 2020;
• Issued directly into Euroclear and/or Clearstream.

Commercial paper with any non-standard features, such as extendibility or subordination, will not be accepted under the scheme. The minimum size of an individual security that the Fund will purchase from any single participant is £1 million and offers must be rounded to the closest £0.1 million.

Which companies are eligible to participate in the CCFF?

The Fund will purchase commercial paper issued by companies (including their finance subsidiaries) in sound financial health that make a material contribution to economic activity in the United Kingdom. In its Market Notice published on 18 March, BoE clarified that eligibility is not limited to businesses that operate solely in the UK, but UK incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK, would be expected to meet the criteria.

Other factors that could assist with meeting the "UK economic activity" requirement include: companies with significant employment in the UK or with their headquarters in the UK; companies operating a number of sites in the UK or generating significant revenues or serving a large number of customers in the UK. Non-bank financial companies that make a material contribution to corporate financing in the UK will also in principle be eligible, whereas CP issued by leveraged investment vehicles or from companies with groups that are primarily banks, investment banks or building societies will not qualify.

How does a company demonstrate sound financial health?

Another important criterion that must be met by those wishing to participate in the scheme is the ability to demonstrate that the company was in sound financial health prior to the COVID-19 economic shock. Generally, this means that a company must have had a short- or long-term rating of investment grade as at 1 March 2020. For short-term ratings, this would equate to a rating above A3/P3/F3 and for long-term ratings, it would be a rating above BBB-/Baa3/BBB- from at least one of S&P, Moody's or Fitch. If a company has different ratings from different agencies then they all need to be at or above these levels; if any rating is below investment grade then the commercial paper is not eligible for the CCFF.

Does this mean that a company that does not have a rating cannot participate?

No, not necessarily. If firms do not already have a credit rating, then one solution is for the company or its bank to contact one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with BoE and HM Treasury, noting that the assessment relates to participation in the CCFF. BoE has already held discussions with the ratings agencies and has indicated that the following forms of credit assessment should be considered suitable evidence of credit status for the scheme:

Moody's Investor Services

• Long and short term public corporate credit ratings
• (Private) "Indicative ratings" at a recent point-in-time (for those approaching rating agencies for the first time)

S&P's Ratings Services

• Long and short term public corporate credit ratings
• "Credit Assessments" at a recent point-in-time (for those approaching rating agencies for the first time)

Fitch

• Long and short term public corporate credit ratings
• (Private) Credit opinion at a recent point-in-time (for those approaching rating agencies for the first time) – n.b. BoE has indicated that a form of Fitch "credit opinion" incorporating a rating rationale is preferred.

It should, however, be noted that HM Treasury reserves the right to make use of other products or to deem any security ineligible for any reason.

What happens if a company is downgraded or its financial condition weakens?

Provided that a company has demonstrated good financial condition prior to 1 March 2020, it will remain eligible to participate in the scheme, subject to HM Treasury approval.

What are the next steps after a company has submitted the relevant paperwork to participate in the CCFF?

BoE aims to confirm whether commercial paper is eligible as soon as possible and, provided confirmation is received before 16:00 on a working day, a company will then, via its bank, be able to sell commercial paper to BoE the next working day. Companies that participate in the CCFF will be required to sign a confidentiality agreement with BoE.

If my company sells commercial paper as part of the scheme, will the details be made public?

No, the names of issuers and details of the securities declared eligible and/or purchased will remain confidential. Each Thursday at 15:00 BoE will, however, publish both the total amount of commercial paper purchased that week in terms of the amount paid to the sellers, and the total amount of commercial paper purchased to date, minus any commercial paper that has already matured.

How long will the CCFF be in operation?

The scheme will operate for at least 12 months and will continue for as long as necessary to relieve cash flow pressures on firms that make a material contribution to the UK economy.

How and when can I apply to participate in the scheme?

BoE will publish more information on the application process on Monday 23 March.

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